What's Causing Overreaction? An Experimental Investigation of Recency and the Hot-Hand Effect

22 Pages Posted: 8 Dec 2004

See all articles by Theo Offerman

Theo Offerman

University of Amsterdam - Faculty of Economics & Econometrics (FEE)

Joep Sonnemans

University of Amsterdam - Amsterdam School of Economics (ASE)

Abstract

A substantial body of empirical literature provides evidence of overreaction in markets. Past losers outperform past winners in stock markets as well as in sports markets. Two hypotheses are consistent with this observation. The recency hypothesis states that traders overweight recent information; they are too optimistic about winners and too pessimistic about losers. According to the hot-hand hypothesis, traders try to discover trends in the past record of a firm or a team, and thereby overestimate the autocorrelation in the series. An experimental design allows us to distinguish between these hypotheses. The evidence is consistent with the hot-hand hypothesis.

Suggested Citation

Offerman, Theo and Sonnemans, Joep, What's Causing Overreaction? An Experimental Investigation of Recency and the Hot-Hand Effect. Scandinavian Journal of Economics, Vol. 106, No. 3, pp. 533-554, September 2004. Available at SSRN: https://ssrn.com/abstract=623341

Theo Offerman (Contact Author)

University of Amsterdam - Faculty of Economics & Econometrics (FEE) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands
+31 20 525 4294 (Phone)
+31 20 525 5283 (Fax)

Joep Sonnemans

University of Amsterdam - Amsterdam School of Economics (ASE) ( email )

Roetersstraat 11
1018 WB Amsterdam
Netherlands
+31 20 525 4249 (Phone)
+31 20 525 5283 (Fax)

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